Navigating Through The Challenges Of Cross Border Transactions And Investments – Aftermath Of COVID-19 Pandemic

Cross border transactions have always been challenging and potentially promising in terms of the rewards and business opportunities they bring. Public appetite for cross border transactions and international trade has increased tremendously over the years. While the market did witness an ever-so-slight decline in such transactions due to the Covid-19 pandemic in the first financial quarter of 2020, trends seem to have changed and cross border mergers and acquisitions are back spearheading the corporate industry. Nevertheless, the new market opportunities presented by cross border transactions are accompanied by a range of challenges. 

Site visits have become a little difficult to come by where cross border travel is involved.  The ability to sit face to face and study body language is priceless to decision making.  We have seen clients often sign on to buy foreign manufacturing facilities and thereafter having to extend transaction timelines because they were unable to travel to examine the plants.  Similarly, reliance on local management and transition is making post-merger integration tricky. Clients nowadays look to structure acquisitions such that they get some time to ride out the Covid-19 pandemic – and this has increased the need to have continued presence of sell-side and company management in the near to mid-term. Further, tax structure and landscape varies across jurisdictions and can also pose significant hurdles unless thoroughly examined by experts. For instance, a potential acquirer may assume that a target’s past accumulated losses may be set-off or used but this may not be possible in all scenarios. Tax planning and researching tax implications therefore, becomes crucial, especially at the diligence phase while acquiring any new business. While this has not changed per se due to the Covid-19 pandemic, and was something to be seen and addressed even before, impact of Covid-19 on tax holidays, ability to complete tax related obligations, etc., all need to be addressed. Akin to tax challenges, heightened risks are posed in any M&A deal due to the differences in the legal regimes of the acquirer and the target. This, in turn, makes the due diligence phase of any deal extremely crucial for the viability and success of such deal. This is relevant to acquisition and also to starting new businesses. Several countries have revisited their foreign ownership and investment regulations and introduced tightened screening procedures in new sectors. 

Engaging advisors experienced to handle the risks mentioned previously is a first step which may be taken. Legal advisors in the acquirer’s home country may have substantial connections with legal professionals in the target’s home country who may be employed to conduct in-depth legal due diligence and minimize the legal and regulatory risks. Similarly, we often witness deals where acquirers employ financial consultants, for instance, one of the Big 4 accounting firms, to conduct financial and accounting diligence. This helps in addressing tax and valuations challenges. A lot of organisations now go the extra mile and undertake “business” due diligence or integrity due diligence. Insurance brokers are also often roped in to check insurance coverage levels.  Clients are now not only using in-house teams, but asking us to train them in reporting – because apart from diligence, recording the results and suitably carving out risk mitigation are also crucial.  This is equally critical for successfully planning organic and inorganic expansion. 

It is also imperative to discuss the impact of ESG on cross-border due diligence. The shift towards a stakeholder-centric governance model across the globe has made investors more socially conscious. Companies are now evaluated not just from the perspective of profitability but also based on their focus on environmental, social and governance (ESG) factors. With increasing awareness of ESG issues amongst the various stakeholders, we certainly see ESG becoming a prominent aspect and gaining prioritization in the due diligence process during M&A deals especially in sectors such as infrastructure, manufacturing and other heavy industries. 

While organisations are becoming more competent and experienced in cross-border acquisitions by acknowledging the importance of comprehensive planning and tapping the expertise of external advisors to conduct thorough due diligence, it is still advisable to remain cautious as one navigates through global economic and political instability.